(Update: Since the original post date we have added two additional posts on the GM Cure Cost Procedure and the Supplier Objections that were filed to GM Cure Costs. Please Click the preceding link to see those posts.)

The Chrysler bankruptcy taught suppliers several lessons.  Lesson 1 –  SUPPLIERS, BE READY TO CONFIRM THE CURE AMOUNT FOR THE ASSIGNMENT OF GM SUPPLY CONTRACTS. Consider the years that your company has worked with GM. If your company got a cure cost notice from GM today, would it be ready to say “If GM pays my company this amount, my company has no further claims against GM, and if it does have additional claims, we give them up?” A lot of suppliers in the Chrysler bankruptcy found out the hard way that they were not ready to respond; the pain just has not hit yet.

The “restructuring” of Old GM is going to occur through a “363 sale” to New GM. (A 363 sale is no more than a sale of assets of a bankrupt company approved by the bankruptcy court pursuant to Section 363 of the Bankruptcy Code.)  A 363 sale is a great way for a buyer to sanitize assets of any unknown or unintended liabilities.   Only those liabilities that are expressly assumed by the buyer are going to go along with the purchased assets.

In the case of a supply contract between a supplier and a bankrupt customer, that contract is both an asset (including an obligation of a supplier to perform) and a liability (the obligation of the customer to pay).  The Bankruptcy Code simply says that a buyer can not be assigned the benefits of a contract without also satisfying all outstanding obligations and assuming all future liabilities under the contract.  As part of this assumption and assignment process all “defaults” under the contract must be cured. Curing defaults most often takes the form of a payment that is called a “cure cost” or “cure amount”.

A supplier will receive notice of the intent of GM to assume and assign the supply contract to “New GM”.  The notice will include a statement of the “cure cost” – the amount to be paid to the supplier to satisfy all defaults under the supply contract.  The supplier has only a short time to object.  The objection must have the elements required by the bankruptcy court and must be made in accord with the procedures required by the bankruptcy court.

Consider the following examples:

Example 1:  Your accounting department/customer service department missed an agreed price adjustment due to material price change.  GM continues to pay at the old rate.  A cure cost notice comes in from GM, which only includes the amount of outstanding invoices.  You do not respond to the cure notice and the response period expires.  You have lost the ability to claim the unreimbursed material price increase.

Example 2:  The contract per piece price was based on a certain agreed volume.  The volumes were significantly less or the program was canceled. You have tons of excess material, unamortized tooling costs, etc. Unless you object to the cure cost amount, you loose the ability to claim these damages.

Example 3:  The contract provides for GM’s reimbursement of capitalized tooling costs.  The tooling costs are due but have not been paid.  The cure cost notice only includes outstanding invoices for part deliveries.  Your accounting department reviews the cure costs but misses the uninvoiced tooling reimbursement obligation.  Again, the tooling reimbursement claim is lost.

The examples are endless.  To see some grounds for the cure costs objections of suppliers in the Chrysler bankruptcy see the earlier post Chrysler LLC Bankruptcy – Supplier Contract Cure Costs Horrors.

So what happened in Chrysler’s bankruptcy?  Chrysler filed bankruptcy on April 30.  On May 14, Chrysler sent out “cure cost” notices.  Suppliers had 10 days to object to the cure cost amount.  A failure to object meant that the supplier agreed to the “cure cost” and was forever barred from claiming any additional amounts due under the contract prior to the notice.

Supplier after supplier filed objections that there was not enough time for the supplier to determine the actual cure cost.  Worse yet, the responses of some suppliers indicated that they did not understand that the cure cost was to cover any and all amounts due under the contract –  not just the outstanding invoices for goods delivered or services provided.

So what is LESSON 1.  Each supplier should START NOW to determine the amounts due under the supply contracts with GM.  This requires that (1) all supply contracts, purchase orders and any other contract documents be pulled out and examined; (2) the accounting department double check that all price adjustments have been captured;  and (3) operations, legal and purchasing department conduct a review of any potential outstanding claims.